NOTE: All charts here are encoded with Morgan Visual Trend Indicator (MVTI). Available on the Thinkorswim platform share at this URL:
MVTrend is encoded by the color of the candlesticks, and has five states as follows:
- Strong Down: RED
- Down: ORANGE
- Neutral: PURPLE
- Up: BLUE
- Strong Up: GREEN
Harmonic Elliott Wave
Harmonic Elliott wave is a modification to the fundamental price fractal structure proposed by R.N. Elliott and used by all Elliott wave practitioners today. Harmonic EW is the work of Ian Copsey, and is detailed in his excellent text “Harmonic Elliott Wave: The Case for Modification of R. N. Elliott’s Impulsive Wave Structure”.
The essense of HEW is that waves 1, 3, and 5 of an impulse decompose to an ABC swing structure, NOT a 1-2-3-4-5 impulse structure. What does decompose to a five wave impulsive structure? A and C waves. The pattern formed is identical to the leading and ending diagonal structure in standard EW modeling. HEW eliminates all the special cases of EW (diagonals, 5th wave failures, and extensions), allowing them to all be modeled in an identical and standardized manner. I personally am finding HEW to be both easier to apply and more rigorous, meaning, I end up with fewer “alternates” and my confidence in the models is substantially higher.
HEW is still not broadly used. Ian Copsey’s old (no longer active but still available) website is a good resource: http://www.harmonic-ewave.com/
The most active trading advisor I have found to date utilizing HEW (exclusively) is at the following location: http://www.castawaytrader.com
You will find that new modeling from myself (it is 6/7/20 as I write this) will almost always be using harmonic Elliott wave structure.
Fibonacci Structure Example
Got Fibonacci retrace and extension levels? Oh yes we do. Check out this monthly chart of AAPL. All the key swing are marked, and the pivots or stalls at the key Fibo levels are marked as well. Over…and over…and over…and over….
Projecting Potential Turn Targets Using Fibonacci Fitting ™
9/18/19 7:00am PDT: Here’s a set of Fibonacci Fitted projections on GS (the chart says GD, sorry that’s a typo), striving to identify the ultimate pivot high of the swing upward on this daily chart. The #’s are the count of the “touches” of the Fibonacci structure that points to that particular level as the ultimate final pivot high, a kind of “score”. We’ll monitor this and see how things play out. Of coures the play is the finally see a hit and then top structure form, then a trigger set up, and then as it fires we short.
UPDATE 9/25/19: the lowest Fib fit level (the high on this chart) provied to be exactly the high for this upswing in GS, and it’s now down about 5% from these levels. Bingo.
8/20/19 11:29am: Here’s an example of using Fibonacci fitting at a low timeframe (5 minute chart) to project potential price swing completion levels. The purple dashed lines are the fitted targets. I’ve left the Fibonacci structure in place for the second to lowest target so you can “see the fit”.
How will I “know” the bottom is in? Well, I’ll estimate the probability at “very likely” when the bullish symmetry is broken. That’s measured by the largest up swing through the course of the down swing, projected off the potential bottom, thus:
Trading RUT via UWM
8/19/19: RUT was very well set up last Thursday at the close, as described in the RUT updates. On Friday price open gap up off strong support on what was legitimately modeled as a completed WXY correction forming a 2 wave, with the new action potentially launching a 3 up. Here’s the trade and the status of the it’s management so far:
Update 8/20/19 11:24am: RUT opened this Tuesday down, and moved down, and triggered the stop for the second 1/2 of this trade. Total result: 4.1% profit in 3 trading days, for a trade profit efficiency of 1.37% per day. That’s exceptional.
EXCERPT from “Pragmatic Trading”
Please enjoy this except from the draft of the upcoming book, “Pragmatic Trading: Professional Planning and Modern Methods”.
Profit Exits
There are two fundamental means of exiting a position at a profit: exiting on a limit order at a target price (or effectively the same: deciding price is “high enough” and selling on a market order), and exiting on a stop that is above the entry price.
Tangential to these two methods is the alternative of partial (incremental) exits. For example, closing 1/2 of a position on a limit order for a profit, and then holding the second 1/2 for a higher target price exit level using trailing stops.
The use of a price target via a limit sell order is a extremely common and highly recommended trading tactic. I strongly recommend the use of fairly small profit targets (in percentage terms) for at least part of a position. Such a target might be anywhere from a level of 1.5% profit to 5-8% on the high side. I commonly use a 3% target, and I often sell all of my position at this small (but significant!) profit level, and sometimes when I suspect a larger move is a strong possibility, I sell 1/2 of the position at this level.
While I am specifying these target profit exit levels in percentage terms, it is of course rational to use all the tools have available to project likely price levels that price will achieve and potentially stall and/or turn at, to identify targets that balance our desire for large profits with our desire for rapid profits.
The alternative to the use of a limit sell at a target profit level for at least some of the position is to use a (frequently adjusted) trailing stop. One method for trailing the stop has already been addressed: the use of average true range (ATR) stops at some ATR level (I recommend a 3.0 setting, vs. the common default of 3.5), and the use of the parabolic stop and reverse (I recommend an adjustment factor of 0.01 rather than the default of 0.02). As described before, there may be advantages to using these two in combination, and using the highest of these two stop levels as the actual stop point.
Two other methods for trailing stops are to adjust to each successive swing low formed by the candlesticks on the chart at the time frame being traded, or to trail the stop at the lowest low of the most recently completed N candlesticks (3-4 typically). These methods have the advantage of “naturally” following the price action in a rather close manner, vs. the pSAR and ATR stops which can trail quite far away in a rapidly rising market.
Here’s an example of a trade I made at the daily time frame in ANET. See “Profit Exit Examples, ANET Daily”.
The stock was purchased on the formation of a distorted head and shoulders bottom on the break of the neckline. In the case of the trade I executed, I used a deep (15% stop, not show on the chart) and a 4% limit sell as the target. A number of alternatives are presented on the chart, along with the results of each. First, pSAR and ATR stop levels are shown. The pSAR behaves as described earlier: it trails the ATR stops early on, then races past them. The result of the pSAR stop is very good, with a 5.6% profit. The ATR stop however comes in a bit below the fixed profit target actually achieved at 3.8%. This is an excellent demonstration of why using the higher of the pSAR and ATR stops is superior to either alone.
The advancing candlestick swing low stop strategy is also shown, with horizontal bars showing the levels of advancement of the stop over time. Note how much more aggressive this strategy is relative to pSAR/ATR trailing stops. The final result is identical to the pSAR stop with a profit exit at the 5.6% level. Left to the reader is to assess the result of a 3 candlestick back strategy. Hint: the stop levels tend to closely track the swing low method, and has the same final exit result.
A common strategy is the combine these specific tactics using partial exits. One that I highly recommend is to sell some percentage (30% or 50%) at a fixed target profit percentage using a limit sell. Some consideration of the volatility of the stock should be factored into the choice of a fixed limit sell target. For the type of high volatility stocks I recommend (those with finviz.com volatility levels of 2.5% or more), I like to use 3%, and scale that up to 4% if the volatility of the stock is extreme (4% or more).
A balanced trade mechanic architecture should increase the partial position size sold at a fixed profit target with an increasing profit target percentage. Conceptually, this represents a shift of selling part to de-risk, vs. selling part to achieve profits.
For example, one approach is to use a profit target of 1.5% to quickly “de-risk” the trade, selling 33% of the position. In conjunction with this target being hit, a stop on the remaing 67% is raised to no less than a 0.75% loss level, thus getting the trade at or extremely close to a break even (ignoring the risk of gaps) state. When a trade reaches this state, I refer to it as a “free trade”: no risk (pragmatically, very small risk) and unlimited potential upside.
On the other hand, one might target a limit sell of 3% of 50% of the position, with a plan to advance the stop at the limit sell to a minimum level of -3% loss for the remaining 50% (or, alternatively all the way to break even).
One issue that arises is the question of “at what time frame?” . You will get a different stop level from ATR stops and pSAR stops at the daily time frame vs. the hourly. This question gets to the heart of “what time frame are you trading?”. If you are trying to catch a very short and very high momentum move at the 5 minute time frame, obviously stop levels presented by these tools at the hourly or daily level are irrelevant (your stops will be far too loose). And similarly, if you a buying on a bottom turn on the weekly chart, and anticipating significant price movement on the monthly and quarterly time frames, then using the daily or lower time frames for stop management is inappropriate (your stops will be far too tight).
As an example, see “Profit Exit Examples, ANET Hourly”.
At the hourly time frame, all of the techniques discussed result in lower performance. The swing low stop after its third rise gets undercut (very slightly, but that’s all it takes) at the 3.1% profit level. The pSAR and ATR stops fair about the same, at 3.0% profit. (Not shown is any N-candlestick low trailing stop, which results in a tiny profit in this example.) We could say the swing low stop technique fails because there is more price jitter (more frequency of pivot lows being formed and then undercut and then the trend re-initiating). We could say the pSAR/ATR stop technique fails because the hourly momentum through a longer multi-day move through some periods slows down (the curve of price on the chart “flattens”) and the hourly pSAR/ATR catches up “too soon”, relative to the daily candlestick trend we are striving to ride with our position. For these reasons, unless you are executing day trading targeting much smaller percentage moves over much shorter periods (a reasonable technique, however, one that requires a demanding level of market engagement personally) I would recommending using the daily chart for managing stops.
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Current Positions:
Here are my current positions: NOTE: these change fast. So note the date!
8/30/19
ATHM, AVGO, BLDR, BLUE, CUB, ECL, INTC, IQV, JBL, LIND, OMCL, UNP, UPRO, VSAT, SBUX (short butterfly), TLT (long butterfly at 150 and short spread at 147/146).
Example Trades
Here’s a classic “short cycle” SPEC-K style trade, in EXP. Entered on Friday 7/12/19, out Tuesday morning 7/16/19, for a quick 3% profit. That’s not large? Compound that at every 2 days and see just how large it is! Obviously, a 2 day cycle is fast…and ideal! Check out the trade. The higher time frame EXP is in a large up trend, but also for many weeks in a sideways consolidation pattern, with the move down on the chart cutting a little beneath it. I estimated a move back into the range would be likely ‘Sho ’nuff!
Here’s a close on Tuesday 7/16/2019 for a profit. This one I bought one day earlier. This is the benefit of keeping ALL YOUR MONEY IN TRADES ALL THE TIME (if you have a +EV trading methodology!!). Some will pop quick. And cycle time is king. Compounding small but very fast beats a little bit larger but much much slower.
Here’s an update to BZUN a day later. Wham, back down! But not before I’ve run away with the cash.
Here’s MELI, exited today (7/15/19) for a 3% profit. Note that I caught the “price spike” with my limit order, nice! Typical “Spec-K” style trade here.
Trade Examples – July Actuals
The following results are missing July 31…and I’m hoping for some fireworks tomorrow too (Fed announcement day). Meanwhile…
Trade Examples – June Actuals
Spec-K Trading 